Spain announces 27 billion euros in budget cuts

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A police officer walks alongside demonstrators during a day of national strike in central Madrid on Thursday.

Story highlights

"We are in a critical situation," treasury minister says

Civil servants' salaries will be frozen; business taxes will increase

Announcement comes a day after strike is called to protest labor market laws

Cuts are part of effort to bring deficit in line with EU demands

Spain's new conservative government announced 27 billion euros ($35 billion) in cuts from the budget this year to reduce the deficit in the midst of the nation's prolonged economic crisis.

"We are in a critical situation. This is the most austere budget in our democracy, and with tax measures to bring in new income to guarantee public services," Treasury Minister Cristobal Montoro said after the weekly Cabinet meeting.

There will be an average spending reduction of 16.9% at government ministries. Salaries will be frozen for civil servants, who will be required to work an additional 10 hours per month. Business taxes will increase, but sales tax will not, to avoid further dampening consumption, Deputy Prime Minister Soraya Saenz de Santamaria said.

The much-anticipated announcement came a day after a general strike called to protest labor market reform laws, which the government has approved, that unions say make it cheaper and easier to fire workers.

The strike slowed industry and transport but had less impact on commerce. Hundreds of thousands of union supporters demonstrated late Thursday in Madrid and across Spain. There were scattered incidents of violence, including in Barcelona.

Spain's unemployment rate is 23%, and twice that for young people. A total of 5.3 million Spaniards are out of work. The government predicts that the economy will contract this year by 1.7%.

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Spain has come under increased scrutiny from the European Union after Prime Minister Mariano Rajoy announced that Spain's deficit, as a percentage of gross domestic product, would not be 4.4% this year, as previously targeted, but 5.8%. Brussels responded by demanding that it be 5.3%.

The spending cuts and tax increases announced Friday aim to bring Spain in line with the 5.3% objective.

Economy Minister Luis de Guindos, attending a European Union ministers meeting in Copenhagen that was closely monitoring Spain's budget announcement, said, "We are convinced that Spain will stop being a problem for the Union."

Montoro said he would take the budget to parliament on Tuesday. The government has a commanding majority in parliament and does not need the support of any other party to approve its budget.

There will be cutbacks in infrastructure investment, defense spending, education scholarships, aid for immigrants and housing subsidies and in foreign development aid, Montoro said.

The government has raised income taxes and announced Friday that it would seek more business taxes on large corporations. Analysts said it apparently aims to cut tax loopholes.

Pensions will not be affected.

"These are a variety of measures aimed at getting out of this situation and growing the economy and generating jobs," Saenz de Santamaria said.